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Seth Klarman's Advice on Long-Term Investing

Insight from the renowned value investor

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Mar 25, 2019
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One of the few advantages value investors have over the rest of the market is time. Value investors can be more patient, which means they can make the most time arbitrage -- buying deeply discounted securities and waiting for the valuation discrepancy to correct itself.

This means it is essential for value investors to have a long-term orientation, which is a strategy both

Warren Buffett (Trades, Portfolio) and Seth Klarman (Trades, Portfolio) have benefited from over the years. Both of these renowned investors realized early on that to be a genuinely great equity investor, you have to look past the next quarter, far into the future and try to ignore near-term market gyrations.

Klarman, in particular, believes it is essential for value investors to have a long-term focus so they can concentrate on what matters most; reducing risk:

"We don’t try to be anyone’s best performing manager in a given year because such an attempt would almost certainly fail. It would distract us from our focus on risk-aversion and the pursuit of excellent long-term results while shifting our attention toward quick gains, short-term trades and market momentum."

While Klarman uses a different investment strategy from Buffett, who tends to buy and hold securities forever (Klarman's hedge fund Baupost tends to be a more active trader), the author of "Margin of Safety" has said that whenever he buys a security, he buys with the intention of holding it potentially forever, even though he tends to buy stocks with an upcoming catalyst:

"With the exception of an arbitrage or a necessarily short-term investment, we enter every trade with the idea that we are going to hold to maturity in the case of a bond and for a really long time, potentially forever, in the case of a stock."

Klarman realized early on in his career that he is a value investor through and through, and he has no distinct advantage over more short-term-orientated investors and traders. With this being the case, he has never concentrated on trying to make money in the short term.

He focuses on his strengths, understanding a company's fundamentals, buying and holding, something many other market participants struggle to do, particularly over a long period of time. In many ways, this is similar to Buffett's circle of competence, which he has often discussed. Klarman knows his circle of competence in investing quite well and is not willing to stray outside of it to make a quick buck:

"We are always long-term oriented. We never attempt to gauge near-term market movements; we have no edge there. We strive to make long-term investments that have truly compelling risk-reward characteristics. We are never afraid to stand apart from the crowd. We stick to our game plan, and focus on areas where we are skilled and experienced. We are resolute in resisting the short-term performance pressures and herd behaviors that plague the investment business."

Having this mentality also means Klarman will not be pushed into making any sudden investment decisions. He is quite willing to sit back with a large cash allocation and wait for the perfect opportunity -- copying Buffett and

Charlie Munger (Trades, Portfolio)'s strategy of lying in wait until it is time to strike:

"We’ve maintained a commonsensical, albeit increasingly unconventional, approach to investing in that we strive to maintain a long-term perspective in a world of short-term actors, and we patiently hold cash in the absence of compelling opportunity, refusing to pull the trigger until the target is clear and compelling."

Most investors will struggle to follow such a disciplined and inactive approach; that's why those that are willing to have been able to profit so immensely -- that's what the evidence seems to suggest anyway.

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